The rise of Cloud Kitchens: A revolution in the making

Zomato set a new record by raising an IPO of about $1.3 billion in July 2021, surpassing the $1.17 billion raised by TCS back in 2004. That is not of much use if you aren’t a market enthusiast. But, you may ask, "What is Zomato going to do with that money?” is pretty interesting. It is said that Zomato is raising these funds to move to the next phase in the food industry; “Cloud Kitchens”. Before we dive deep into that, let’s understand what a cloud kitchen is all about.

Gone are the days with pens and papers. These days, we store our files, stream music and movies and even run our businesses in the cloud. What many of us don’t realize is that it’s also where we’re ordering our food from. Cloud kitchens, sometimes called ghost kitchens or virtual kitchens are commercial facilities built exclusively to take orders online and deliver them home. It might sound familiar as the Chinese have been doing it for decades now. The pizza industry has built itself around optimizing for delivery. But, moving to a completely delivery only model has been made possible only by the technological advancements of recent years and the corresponding consumer habits. Experts believe that cloud kitchens are a revolution in the making. It is so because of the exclusive cost advantages they provide over traditional kitchens, which will be discussed later.

That brings us to answer an existential question; “Where do cloud kitchens fit into the food industry?”

Virtual kitchens as a concept were gaining popularity even before the pandemic struck. With the pandemic hitting, again and again, cloud kitchens are emerging as a strong and lucrative option to entrepreneurs for two major reasons. Firstly, they deliver orders straight to the customer’s place of choice, much like the pizza industry. Secondly, they can work in a fraction of the space required for a traditional restaurant. In the pre-pandemic era, there was an explicit demarcation between delivery-only brands and dine-in brands. This verge has started to fade ever since. It is too early to determine a future where they coexist together, considering the uncertainty in the market.

How do cloud kitchens work? Cloud kitchens are commercial food production facilities where more than one, even dozens of restaurants rent space to produce delivery-optimized food. Cloud kitchen menu items are focused on delivery and quality of food upon doing so. They are extremely optimized to get the prepared food out to the customer’s house as fast as possible. They take advantage of the food delivery apps on your smartphone like Swiggy, Zomato, UberEats and many more. That is where these apps come into play. They use a ton of user data to make out a menu for every season of the year. As technology expands, the production of food for multiple orders becomes easier besides, minimizing wastage.

There are a few popular business models for cloud kitchens.

The first one is to simply add a delivery brand to an existing dine-in restaurant. That would let the operator squeeze the maximum out of the workers, facilities and the space available for extra profit. This model has its downsides. First, this kitchen wasn’t purpose-built for this and so, the delivery orders may be put down the priority list. That causes delays in the delivery process. That might also affect the dine-in experience as delivery agents will keep coming in and out. Things might get messy as the restaurant tries to fulfil multiple orders with two sides of the business getting in the way of each other.

The second model is to run a proper virtual restaurant. A cloud kitchen doesn’t have a storefront. This solves some of the problems mentioned in the first model. Running a virtual restaurant requires space for rent, visibility on delivery service apps like Zomato, optimized labor, facilities and ingredients for production. A cloud kitchen could satisfy all these requirements.

The third model is to run a shared cloud kitchen. That is a business in itself, where entrepreneurs rent kitchen space to multiple brands, much like a co-working space. Here, the entrepreneurs act more like landlords than as food producers. They provide all the facilities for virtual restaurants to run and succeed.

Now, since we have understood something about the models and working of cloud kitchens, let's see where the delivery apps come into play and why they could be significant players in the future market.

All the above-mentioned models for cloud kitchens utilize the delivery service apps available on mobiles like UberEats, Zomato, Swiggy, etc. These apps use a lot of user data and seller data to make out a menu for every hour of the day and every season of the year. Let’s take a classical example of Amazon to understand this.

Every year, hundreds of Amazon Basic products are unveiled and they succeed straight away. That’s not how products work, isn’t it? If we take a closer look, Amazon is a middleman between a seller and a buyer. So, naturally, they have the seller and the consumer data with them. By this, Amazon pretty much knows which products are preferred by people at which time of the year, the rational pricing of the product, what people dislike about the product and so on. Then, they rent a production house to make a similar product, built over the short-comings of the bestseller and price it aggressively for sale. Another power that Amazon has is that of “Digital Real Estate”. By this, Amazon could pose their products to be the number one. Thus, Amazon effectively is eating into the business of its sellers by eliminating the bestseller himself. Amazon earns huge profits by this, without having to do the hard work of trial and error.

If we translate this to the food market, Zomato and Swiggy are middlemen, just like Amazon. They also have a ton of user data and seller data in possession. With the use of their digital real estate, they can promote their products to the top and maximize profits. Zomato and Swiggy have been working along these lines for some time now. Swiggy Access and Zomato Kitchens are the official cloud kitchens of the respective brands. They are serving a large proportion of the Indian population already, with the best part yet to come. One of the major insecurities of a cloud kitchen or for that matter, any restaurant, is the supply of raw materials. Zomato has been building a robust chain of raw materials called “Zomato Hyperfresh”, which connects the kitchen directly to the source of raw material. That makes them immune to any shortages in the supply in the public market.

Now, let us address why this is believed to be a revolution in the making. For an economy to develop, public spending is equally important as public earning. As more and more people go to work and earn more, their standard of living tends to increase. Furthermore, due to the lack of time, people prefer ordering food or picking them up on their way home. That is what makes these cloud kitchens a lucrative business. Experts suggest that it won’t be too long before cloud kitchens take over the food market and outnumber traditional dine-in restaurants.